How your doctor gets paid by insurance companies matters 

Healthy bottom line

click to enlarge Health care payment methods matter. - GEORGE MURESAN / SHUTTERSTOCK.COM
  • George Muresan / Shutterstock.com
  • Health care payment methods matter.
Capitated payments. Value-based care. Fee-for-service.

While they have wonky names, health care payment models — how your health insurer pays your doctor, or the group/company that your doctor works for or contracts with — have a tremendous impact on the quality of care patients receive and the bills mailed to them afterward.

Various payment models aim to deliver quality care at a reasonable price by paying directly for services rendered, offering providers set monthly payments or paying providers more for better results. Yet, a 2018 study by Harvard T.H. Chan School of Public Health and the London School of Economics, published in the Journal of the American Medical Association, found that Americans spend far more on health care than those in 10 high-income peer nations and still have worse population health outcomes and access to care. According to the Milliman Medical Index, the 2019 cost of health care for an American family of four on an average employer-sponsored PPO health insurance plan is $28,386.

The Harvard study found, “The main drivers of higher health care spending in the U.S. are generally high prices — for salaries of physicians and nurses, pharmaceuticals, medical devices, and administration.” So the model of payment — and whether it trims salaries and cuts administrative costs — matters. Here’s a look at three common models.

Fee-for-service model

The fee-for-service model (FFS) pays providers for the services they render. The Deloitte 2018 Survey of U.S. Physicians found that 42 percent of doctors charge insurers fees for service.

FFS might seem fair, but it has detractors. In a 2017 Forbes editorial, Dr. Robert Pearl writes that the model worked fine a century ago when most medical needs were acute, but the rise of chronic disease has led to skyrocketing costs.

He also notes the Dartmouth Atlas Project, which documents variations in the distribution of medical resources, has found that the treatment of patients tends to follow the available resources.
The more hospital beds in a city, for instance, the more likely a patient is hospitalized. It’s also well-documented that American providers conduct unnecessary procedures, like surgeries.

Pearl writes, “When providers are paid for doing more, that’s what they do: They increase utilization of services and ratchet up the cost of care without even realizing they’re part of the problem.”

Capitation model

Think of capitation as a prepayment. A physician or managed care organization is paid an agreed-upon amount by an insurance company per patient for a set period of time (say, monthly).

Popular decades ago, capitation fell out of favor, largely because providers felt it risky. But a 2017 article on athenahealth.com notes that since the 1990s, digitized health records have eased cost predictions and cut down on duplicate services. And stronger interest in cost savings from major players like Medicare means more momentum.

And a 2016 article in Harvard Business Review says capitation encourages doctors to avoid unneeded care (duplicate tests, unwarranted surgeries, etc.) and cuts billing costs. “It’s the only payment system that fully aligns providers’ financial incentives with the goal of eliminating all major categories of waste,” the article notes. “It fundamentally shifts the role of managing the amount, form, and cost of care from insurers to medical practitioners.”

It’s difficult to determine how popular capitation is currently, and the Colorado Division of Insurance does not track the contracts. But Medicaid commonly uses capitated payments.

State spokesperson Marc Williams explains that Colorado’s Medicaid system contracts with the state’s seven Regional Accountable Entities (RAEs) — regional networks that contract with physicians. Williams says capitated payments allow providers to profit from “[a]ny money left over.”

Value-based care model

The new kid on the block is value-based care (VBC) — paying providers based on patient health outcomes. The hope is that doctors invest in preventive care to keep patients healthy. The Deloitte 2018 Survey of U.S. Physicians found that 31 percent of doctors were paid this way. United Healthcare is among the companies to embrace VBC and the federal Centers for Medicare and Medicaid Services includes some VBC.

A recent study in the New England Journal of Medicine followed the Alternative Quality Contract of Blue Cross Blue Shield of Massachusetts (a VBC) for eight years; its claims were 11.7 percent lower than those in control states.

But the Michigan Health Policy Forum notes that VBCs can have a number of flaws (which it says can be fixed) including deincentivizing doctors to treat patients with complex problems and holding providers accountable for factors outside of their control.


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